Exhibit 10.2


 


THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT.


 


THIS
INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBORDINATED TO
THE PRIOR PAYMENT OF CERTAIN OBLIGATIONS OF THE OBLIGOR TO THE HOLDERS OF
SENIOR INDEBTEDNESS (AS DEFINED HEREIN).


 


THIS
INSTRUMENT AND THE RIGHTS AND OBLIGATIONS EVIDENCED HEREBY ARE SUBJECT TO
RIGHTS OF CANCELLATION AND SETOFF AS SET FORTH IN SECTION 3.6 HEREOF AND
AMENDMENT, WAIVER OR CONSENT BY THE SELLERS’ REPRESENTATIVE AS SET FORTH IN SECTION 8.1
HEREOF.


 


THIS
NOTE MAY NOT BE TRANSFERRED EXCEPT AS PERMITTED IN SECTION 5.1
HEREOF.


 


NO:   S-1


 


CELLU TISSUE HOLDINGS, INC.


 


Subordinated Note Due July 2,
2011


 


	
  $6,300,000.00

  	
   

  	
  July 2,
  2008

  



 


Original Holder: ATLANTIC PAPER &
FOIL CORP. OF NY.


 


FOR VALUE RECEIVED, the undersigned, Cellu Tissue
Holdings, Inc., a Delaware corporation (the “Company”), hereby promises to
pay to the order of Atlantic Paper & Foil Corp. of N.Y. or its
registered and permitted assigns (such original payee or any successor or
permitted assignee from time to time, each a “Noteholder”), on July 2,
2011 (the “Maturity Date”), at the address specified in the Noteholder Register
for such Noteholder (as may be updated pursuant to Section 9.10 hereof),
$6,300,000.00 (subject to adjustment as provided herein) and to pay interest on
the unpaid principal amount of this Note as provided in Section 2 hereof.


 


1.             THE NOTE


 


This Note (this “Note”) is issued pursuant to and in
accordance with the Asset Purchase Agreement, dated as of July 2, 2008
among the Company, Atlantic Paper & Foil Corp of N.Y., Atlantic
Lakeside Properties, LLC, Atlantic Paper & Foil LLC, Atlantic Paper &
Foil of Georgia LLC and Consumer Licensing Corporation (as from time to time in
effect, the “Asset Purchase Agreement”). 
This Note, together with all other subordinated notes which may be
issued 


 

















 


hereunder as a result of any
transfer or assignment permitted hereunder (and any notes issued in exchange
therefor), are collectively referred to herein as the “Notes”, and the holders
of Notes are collectively referred to herein as the “Noteholders.”  Capitalized terms used in this Note have the
meanings ascribed thereto herein or in Schedule A attached hereto.


 


2.             INTEREST PROVISIONS


 


Any remaining unpaid principal amount owed under
this Note bears interest at an annual rate equal to 12.0% of such principal
amount outstanding from time to time, and is payable quarterly in arrears on
each March 31, June 30, September 30 and December 31 (each
an “Interest Payment Date”) and on the Maturity Date, with the first such
payment due on September 30, 
2008.  Notwithstanding the
foregoing, the interest rate shall increase to the “Default Rate” (as defined
below) on the following dates and the Default Rate shall continue in effect
until such time as no Event of Default is then continuing or all Events of
Default have been waived in writing by the Sellers’ Representative: (a) on
any Interest Payment Date on which any interest then due on this Note shall not
be paid in full unless all such interest not so paid when due is paid within 10
days following such Interest Payment Date; (b) on the Maturity Date or any
Refinancing Repayment Event if any portion of the remaining principal shall not
be then repaid; and (c) upon the occurrence of any other Event of
Default.  For purposes of this Note, the “Default
Rate” shall be 15% per annum.  On each
Interest Payment Date, subject to the provisions of Section 7 (including
Schedule B), the Company shall pay the accrued and unpaid interest on this Note
in cash.  Notwithstanding any provisions
of this Note, in no event will the amount of interest paid or agreed to be paid
by the Company exceed an amount computed at the highest rate of interest
permissible under applicable law.


 


3.             PAYMENT PROVISIONS


 


The Company covenants that so long as this Note is
outstanding:


 


3.1.               Payment at Maturity or Refinancing Repayment Event.  On the Maturity Date, on any accelerated
maturity of this Note pursuant to the terms hereof or upon any Refinancing
Repayment Event, the Company will pay the principal amount of this Note then
owing, together with all accrued and unpaid interest thereon.


 


3.2.               Optional Redemption. 
At any time and from time to time, the Company may prepay or redeem any
or all Notes, in whole or in part, at any time without premium or penalty at a
price equal to 100% of the principal amount of the Note so prepaid or redeemed,
together with all accrued and unpaid interest thereon.  Any partial redemption shall be allocated as
among the various Notes on a pro rata basis based on their then outstanding
principal amount at the time of such partial redemption.


 


3.3.               Notice of Optional Redemption.  Notice of each optional repayment or
redemption of this Note pursuant to Section 3.2 hereof must be given in
accordance with Section 9.1 hereof not fewer than three Business Days
before the repayment or redemption date, in each case by mailing to the
Noteholder a notice of intention to repay or redeem, which such notice must
specify the date of repayment or redemption, the principal amount of this Note
to be repaid 


 


2

















 


or redeemed on such date,
and the accrued and unpaid interest applicable to the portion of the Note
subject to such repayment or redemption.


 


3.4.               Payment and Interest Cut-Off.  Upon each voluntary prepayment or redemption
of any of the Notes, in whole or in part, the Company will pay to the
Noteholder the amount of the Note to be prepaid or redeemed, as set forth in
the notice delivered pursuant to Section 3.3 hereof, together with unpaid
interest in respect thereof accrued to and including the repayment or
redemption date (the “Redemption Price”). 
On the prepayment or redemption date, if requested by the Company, the
Noteholder will deliver this Note to the Company for notation thereon of the
amount of principal so prepaid or redeemed, and in consideration therefor, the
Company shall promptly deliver (x) the Redemption Price to such
Noteholder, which will be payable by wire transfer of immediately available
funds to an account designated with reasonable advance notice by such
Noteholder or by check if requested by the Noteholder and (y) in the case
of a partial redemption, a replacement Note reflecting the remaining
outstanding principal amount after giving effect to the prepayment or
redemption.


 


3.5.            Application of Payments.  All payments made by the Company hereunder must
be applied:  (i) first, to the
payment in full of accrued and unpaid interest and (ii) second, to the
reduction of unpaid principal.


 


3.6.           Cancellation; Offset. 
For so long as this Note is outstanding, notwithstanding anything to the
contrary in this Note, the Company may cancel all or a portion of this Note to
satisfy amounts due to the Company or any Buyer Indemnified Person under
Sections 2.5 or Section 8 of the Asset Purchase Agreement.  The Company, in its sole discretion, may
elect by written notice to the Noteholder to cause any such cancellation to be
applied on a dollar-for-dollar basis to (i) the payment of accrued and
unpaid interest, (ii) the payment of interest which will accrue in the
future and (iii) to the reduction of outstanding principal, or any
combination of the foregoing (provided that the Company makes the same election
as to all Notes and that any such offset shall be made against all Notes pro
rata based on their respective outstanding principal amounts at the time of
such offset).  To the extent the Company
cancels all or a portion of this Note, (x) the Noteholder shall be
obligated to repay to the Company the amount of any and all interest that has
accrued (at the rate of interest set forth in Section 2) and been paid on
an amount of principal equal in the aggregate to the amount of such
cancellation from the original date of issuance of this Note to the date of
such cancellation and, in order to satisfy such repayment obligation of the
Noteholder, the Company may, in its sole discretion, elect by written notice to
the Noteholder either to increase the amount of such cancellation by the amount
of such interest or require the Noteholder to pay back to the Company all such
interest in cash (whether or not the Noteholder was the holder of the Note at
the time such interest was paid) in which event the Noteholder shall repay such
cash amount to the Company within five (5) Business Days of such notice
and (y) the Company shall be relieved of the obligation to pay any and all
interest that has accrued but not yet been paid on an amount of principal of
the Note equal in the aggregate to such amount from the date of issuance of the
Note until the date of satisfaction of such amount.  If this Note is transferred in accordance
with the terms hereof, it will continue to be subject to the provisions of this
Section 3.6 (whether or not the transferee is a Seller under the Asset
Purchase Agreement).  In no event shall
the sum of (a) the aggregate amount of principal and interest with respect
to this Note cancelled by the Company by operation of this Section 3.6 


 


3

















 


and (b) the
aggregate amount of principal and interest with respect to all other Notes
cancelled by the Company by operation of Section 3.6 thereof exceed
$2,500,000.00.


 


3.7.           Payments Subject to Subordination.  Notwithstanding the foregoing provisions of
this Section 3, no cash payment of interest or principal or any other
amounts payable under this Section 3 shall be made at any time when the
payment thereof is prohibited by the provisions of Section 7 (including
Schedule B) hereof.


 


4.             DEFAULTS


 


4.1.               An “Event of Default” will exist if any of the
following conditions or events occurs and is continuing:


 


4.1.1.            The Company (i) defaults
in the payment, when due, of any principal amount, when due, or (ii) defaults
in the payment of any portion of the interest obligations under Section 2
when due and such default is not remedied within 10 days after the same becomes
due and payable; or


 


4.1.2.            The Company (i) files,
or consents by answer or otherwise to the filing against it of, a petition for
relief or Reorganization, (ii) makes an assignment for the benefit of its
creditors, (iii) consents to the appointment of a custodian, receiver,
trustee or other officer with similar powers with respect to it or with respect
to any substantial part of its property, (iv) is adjudicated as insolvent
or to be liquidated or (v) takes corporate action for the purpose of
approving a Reorganization with respect to the Company or any of the foregoing;
or


 


4.1.3.            A governmental authority
enters an order appointing, without consent by the Company, a custodian,
receiver, trustee or other officer with similar powers with respect to it or
with respect to any substantial part of its property, or constituting an order
for relief or approving a petition for Reorganization, or any such petition is
filed against the Company and such petition is not dismissed within 60 days; or


 


4.1.4.            The Company increases
the aggregate principal amount outstanding under the Credit Agreements to in
excess of $305 million; or


 


4.1.5.            Any Credit Agreement at any time contains a provision
that prohibits or limits cash payments under Section 2 or 3.1 hereof of
interest or principal on this Note when such payments become due (it being
acknowledged and agreed that the Credit Agreements may contain provisions which
require subordination of such payments to the extent set forth in Section 3.7,
Section 7 and Schedule B of this Note, and, in each case, the existence of
such provisions and their application to such payments shall not constitute an
Event of Default under this Section 4.1.5); or


 


4.1.6.            The Company or any of its subsidiary parties thereto (a) shall
default in the timely payment of rent when due on more than seven
occasions in aggregate for all Leases over any period of twelve consecutive
months, (b) shall fail to make any payment of overdue rent under any of
the Leases within ten calendar days after receiving notice thereof from the
lessor as provided in the applicable Lease or (c)  shall default in the
payment of purchase price payable under any of the Leases.


 


4

















 


4.2.               Acceleration. 
Upon the occurrence and during the continuance of any Event of Default
specified in Section 4.1.2  or Section 4.1.3,
this Note will automatically become immediately
due and payable.  Upon the
occurrence and during the continuance of any Event of Default of the type
specified in Section 4.1.1, 4.1.4, 4.1.5 or 4.1.6, subject to Section 7
of this Note (including Schedule B), the Sellers’ Representative may declare
this Note immediately due and payable by
providing written notice thereof to the Company.  Interest on the outstanding principal amount
will continue to accrue at the Default Rate during any period in which an Event
of Default exists pursuant to Section 2 hereof.


 


5.             TRANSFER AND
REPLACEMENTS OF NOTES


 


5.1.               Transfer of Notes.  No Noteholder may transfer all or any portion
of the Notes held by such Noteholder, except as set forth in this Section 5.


 


5.2.               Permitted Transfers.


 


5.2.1.            Any Noteholder to whom
any Notes are issued in connection with the closing under the Asset Purchase
Agreement may transfer any of the Notes held by such Noteholder, as a gift, to an Individual Owner or a
Member of the Immediate Family of an Individual Owner for no consideration.


 


5.2.2.            This Note may not be
transferred in denominations of less than $50,000; provided that if necessary
to enable the registration of a permitted transfer by a Noteholder of its
entire holding of Notes, one Note may be in a denomination of less than
$50,000.


 


5.2.3.            The Company agrees to promptly register
the transfer of this Note made in accordance with this Section 5 in the
Noteholder Register upon written request of the Noteholder.  No transfer or attempted transfer is
effective until entered on the books and records maintained by the
Company.  Any transfer in contravention
of any of the provisions of this Note is void and of no effect and will not
bind nor be recognized by the Company.


 


5.2.4.            In no event may all or any part of this
Note be transferred to a minor or an incompetent except in trust or pursuant to
the Uniform Gifts to Minors Act or by will or the laws of descent and
distribution (in which event all reasonable efforts will be made by the
executor of the estate of such Noteholder to have such Note placed in a trust
for the benefit of the transferee).


 


5.2.5.            Upon surrender of any
Note at the principal executive office of the Company for registration of a
permissible transfer, duly endorsed or accompanied by a written instrument of
transfer duly executed by the registered Noteholder and accompanied by the
address for notices of each transferee of such Note or part thereof, the
Company shall execute and deliver, at the expense of the Company (except as
provided below), one or more new Notes (as requested by the Noteholder thereof)
in exchange therefor, in an aggregate principal amount equal to the unpaid
principal amount of the surrendered Note. 
Each such new Note will be dated and bear interest from the date to
which interest has been paid on the surrendered Note or dated the date of the
surrendered Note if no interest has have been paid thereon.  The Company may require payment (or
reasonably satisfactory evidence of payment) of a sum sufficient to cover any
stamp tax or governmental charge imposed in respect of any such transfer of
Notes.


 


5

















 


5.3.               Replacement of
Notes.  Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any Note, and, in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to it, or, in the case of
mutilation, upon surrender and cancellation thereof, the Company shall, at its
own expense, execute and deliver, in lieu thereof, a new Note, dated and
bearing interest from the date to which interest has been paid on such lost,
stolen, destroyed or mutilated Note or dated the date of such lost, stolen,
destroyed or mutilated Note if no interest has been paid thereon.


 


6.             REPRESENTATIONS AND
WARRANTIES OF THE COMPANY


 


The Company represents and warrants as of the date
of this Note that:


 


6.1.               Organization; Power and Authority.  The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware.  The Company has the requisite
power and authority to transact the business it transacts and proposes to
transact, and to execute and deliver this Note.


 


6.2.               Authorization, etc. 
This Note has been duly authorized by all necessary corporate action on
the part of the Company, and this Note constitutes a legal, valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms.


 


6.3.               Non-Contravention. 
The execution, delivery and performance by the Company of this Note will
not (i) contravene, result in any breach of, or constitute a default under
its certificate of incorporation or bylaws or (ii) violate any provision
of any material statute or other rule or regulation of any governmental
authority applicable to the Company or any material debt agreement or other
material agreement of the Company, including without limitation any of the
Credit Agreements as in effect at the date of this Note, complete and accurate
copies of which have been provided to the Seller’s Representative.


 


6.4.               Governmental Authorizations, etc.  No consent, approval or authorization of, or
registration, filing or declaration with, any governmental authority is
required in connection with the execution, delivery or performance by the
Company of this Note.


 


7.             SUBORDINATION


 


Notwithstanding any provision of this Note to the
contrary, this Note and the rights and obligations evidenced hereby are
subordinate and junior to the prior payment in full of all other Senior
Indebtedness of the Company, and are subject to the subordination provisions
set forth in Schedule B hereto.  Each of
the Company and the Noteholder, by its acceptance hereof, covenants that each
of them will comply with the provisions of Schedule B hereto.


 


8.             AMENDMENT
AND WAIVER


 


8.1.               Requirements.  This Note may be amended, and the observance
of this Note may be waived (either retroactively or prospectively) only as follows:


 


6

















 


(a)  in the case of a waiver or consent affecting only this
Note, by a written waiver or consent signed by the party against whom the
waiver is to be enforced;


 


(b)  in the case of a waiver or consent affecting all
Notes, by a written waiver or consent signed, in the case of a waiver or
consent to be enforced against the Company, by the Company, and in the case of
a waiver or consent to be enforced against the Noteholders, by the Sellers’
Representative;


 


(c)  in the case of an amendment affecting only this Note,
by a written instrument signed by the Company and the Noteholder; and


 


(d)  in the case of an amendment affecting all Notes, by a
written amendment signed by the Company and the Sellers’ Representative.


 


8.2.               Delivery of
Amendments.  The Company will deliver
true and correct copies of each executed amendment, waiver or consent effected
pursuant to the provisions of this Section 8 that has been consented to by
the Sellers’ Representative and not been signed by the Noteholder to the
Noteholder promptly (but in no event later than 15 Business Days) following the
date on which it is executed and delivered.


 


8.3.               Binding Effect,
etc.   This Note shall have no effect
until it has been countersigned by the Noteholder and a countersigned copy of
the Note has been delivered to the Company. 
Any amendment, waiver or consent consented to as provided in this Section 8
that is specified to apply equally to all Noteholders will apply equally to all
Noteholders and be binding upon each of them and upon each future Noteholder
and upon the Company without regard to whether such Note has been marked to
indicate such amendment or waiver.  No
such amendment or waiver will extend to or affect any obligation, covenant,
agreement, default or Event of Default not expressly amended or waived or
impair any right consequent thereon.  No
course of dealing between the Company and the Noteholders nor any delay in
exercising any rights hereunder or under any Note will operate as a waiver of
any rights of any Noteholder.


 


9.             MISCELLANEOUS


 


9.1.          Notices.  All
notices, requests, demands, claims and other communications required or
permitted to be delivered, given or otherwise provided hereunder must be in
writing and must be delivered, given or otherwise provided:


 


(a)  by hand (in
which case, it will be effective upon delivery); or


 


(b)  by overnight
delivery by a nationally recognized courier service (in which case, it will be
effective on the Business Day after being deposited with such courier service);


 


in each case, to the address listed below:


 


7

















 


If to the Noteholder:


 


c/o Shaun Gabbay


PO Box 222144


Great Neck, NY 11022


Telephone:  (516) 317-7776


 


with a copy to:


 


Skadden, Arps, Slate,
Meagher & Flom LLP

Four Times Square

New York, NY 10036

Telephone number:  (212) 735-2524

Attention:  Randall H. Doud


 


and


 


Steve Cohn, PC

One Old Country Road

Carle Place, NY 11514

Telephone:  (516) 294-6410


 


If to the Company, to it at:


 


Cellu Tissue Holdings, Inc.

1855 Lockeway Drive

Suite 501

Alpharetta, GA 30004

Telephone number:  (678)
393-2651

Attention:  Russell Taylor


 


with a copy to:


 


Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036-8704

Telephone number:  (212) 841-0697

Attention:  Christopher C. Henry


 


and


 


Weston Presidio

Pier 1, Bay 2

San Francisco, CA 94111

Telephone number:  (415) 398-0770

Attention:  R. Sean Honey, Therese Mrozek
and Jim Morrone


 


Each of the Noteholder and the Company may specify a
different address for itself by giving notice in accordance with this Section 9.1
to each of the other parties hereto.


 


8

















 


Written notices to the holders of Senior
Indebtedness shall be made as specified in Schedule C attached hereto.


 


9.2.          Jurisdiction; Venue; Service of Process.


 


9.2.1.            Jurisdiction. 
The Noteholder and the Company (a) hereby irrevocably submits to
the exclusive jurisdiction of the state courts of  the State of New York or the United States District Court
located in the Southern District of the State of New York for the purpose of
any Action between the parties arising in whole or in part under or in
connection with this Note, (b) hereby waives to the extent not prohibited
by applicable law, and agrees not to assert, by way of motion, as a defense or
otherwise, in any such Action, any claim that it is not subject personally to
the jurisdiction of the above-named courts, that its property is exempt or
immune from attachment or execution, that any such Action brought in one of the
above-named courts should be dismissed on grounds of forum non conveniens, should be transferred or removed to
any court other than one of the above-named courts, or should be stayed by
reason of the pendency of some other proceeding in any other court other than
one of the above-named courts, or that this Note or the subject matter hereof
may not be enforced in or by such court and (c) hereby agrees not to
commence any such Action other than before one of the above-named courts.  Notwithstanding the previous sentence a party
may commence any Action in a court other than the above-named courts solely for
the purpose of enforcing an order or judgment issued by one of the above-named
courts.


 


9.2.2.            Venue.  The
Noteholder and the Company agree that for any Action between the parties
arising in whole or in part under or in connection with this Note, such party
bring Actions only in the Borough of Manhattan. 
Each party further waives any claim and will not assert that venue
should properly lie in any other location within the selected jurisdiction.


 


9.3.               Service of Process. 
Each of the Noteholder and the Company hereby (a) consents to
service of process in any Action between the parties arising in whole or in
part under or in connection with this Note in any manner permitted by New York
law, (b) agrees that service of process made in accordance with clause (a) or
made by registered or certified mail, return receipt requested, at its address
specified pursuant to Section 9.1 (with copy to its counsel specified in Section 9.1
at the address for such counsel specified in such section), will constitute
good and valid service of process in any such Action and (c) waives and
agrees not to assert (by way of motion, as a defense, or otherwise) in any such
Action any claim that service of process made in accordance with clause (a) or
(b) does not constitute good and valid service of process.


 


9.4.               Governing Law.  This Note, the rights of the parties and all Actions
arising in whole or in part under or in connection herewith, will be governed
by and construed in accordance with the domestic substantive laws of the State
of New York, without giving effect to any choice or conflict of law provision
or rule that would cause the application of the laws of any other
jurisdiction.


 


9.5.               Waiver of Jury Trial. 
TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW THAT CANNOT BE WAIVED, EACH OF THE COMPANY AND 


 


9

















 


THE NOTEHOLDER HEREBY WAIVE, AND
COVENANT THAT THEY WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY ACTION ARISING IN WHOLE OR IN PART UNDER
OR IN CONNECTION WITH THIS NOTE, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND
WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.  THE COMPANY AND THE NOTEHOLDER AGREE THAT EACH
OF THEM MAY FILE A COPY OF THIS PARAGRAPH WITH ANY COURT AS WRITTEN
EVIDENCE OF THE KNOWING, VOLUNTARY AND BARGAINED-FOR AGREEMENT AMONG THE
PARTIES IRREVOCABLY TO WAIVE ITS RIGHT TO TRIAL BY JURY IN ANY PROCEEDING
WHATSOEVER BETWEEN THEM RELATING TO THIS NOTE OR ANY OF THE CONTEMPLATED
TRANSACTIONS WILL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A
JUDGE SITTING WITHOUT A JURY.


 


9.6.               Successors and
Assigns.  All covenants and other
agreements contained in this Note by or on behalf of any of the parties hereto
bind and inure to the benefit of their respective successors and permitted
assigns (including, without limitation, any subsequent Noteholder) whether so
expressed or not; provided, that the Noteholder may not assign its rights and
obligations hereunder except pursuant to a transfer permitted by Section 5
hereof.


 


9.7.               Payments Due on
Non-Business Days.  Anything in this Note
to the contrary notwithstanding, any payment of principal of, or interest on,
any Note that is due on a date other than a Business Day may be made on the
next succeeding Business Day, including the additional days elapsed in the
computation of the interest payable on such next succeeding Business Day.


 


9.8.               Severability.  Any term or provision of this Note that is invalid or
unenforceable in any situation in any jurisdiction will not affect the validity
or enforceability of the remaining terms and provisions hereof or the validity
or enforceability of the offending term or provision in any other situation or
in any other jurisdiction.  In the event
that any provision hereof would, under applicable law, be invalid or
unenforceable in any respect, each party hereto intends that such provision
will be construed by modifying or limiting it so as to be valid and enforceable
to the maximum extent compatible with, and possible under, applicable law.


 


9.9.               No Third Party Beneficiaries.  Except as set forth in Schedule B hereto,
nothing in this Note may be deemed or construed to give any Person, other than
the Company and the Noteholder and his, her or its respective permitted
successors and assigns, any legal or equitable rights hereunder.


 


9.10.             Noteholder Register. 
For purposes of determining the Noteholders at any time, the Company and
any holder of Senior Indebtedness is entitled to rely on the records of the
Company and, for such purpose, the Company hereby agrees to maintain a register
of Noteholders (the “Noteholder Register”) at its principal office in which the
Company shall provide for registration and transfer of Notes.  Absent demonstrable error, the Noteholder
Register will be conclusive evidence of the ownership of the Noteholders at any
point in time.


 


10

















 


IN
WITNESS WHEREOF, the undersigned has caused this Note to be executed by a duly
authorized officer as of the date first written above.


 


	
   

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Russell C. Taylor

  
	
   

  	
  Name: 

  	
  Russell C. Taylor

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
					



 


 


Accepted and Agreed:


 


Atlantic Paper & Foil Corp.
of N.Y.


 


 


	
  By: 

  	
  /s/ Shaun Gabbay

  	
   

  
	
  Name: 

  	
  Shaun Gabbay

  
	
  Title:

  	
  Secretary

  
				



 


11
















 


SCHEDULE A


 


DEFINED TERMS


 


As used herein, the following
terms have the respective meanings set forth below:


 


“Action” means any claim, action,
cause of action or suit (whether in contract or tort or otherwise), litigation
(whether at law or in equity, whether civil or criminal), controversy,
assessment, arbitration, investigation, hearing, charge, complaint, demand,
notice or proceeding to, from, by or before any Governmental Authority.


 


“Affiliate” means, with respect to
any specified Person at any time means, (a) each Person directly or
indirectly controlling, controlled by or under direct or indirect common
control with such specified Person at such time, (b) each Person who is at
such time an officer or director of, or direct or indirect beneficial holder of
at least 20% of any class of the Equity Interests of, such specified Person, (c) each
Person that is managed by a common group of executive officers and/or directors
as such specified Person, (d) the Members of the Immediate Family (i) of
each officer, director or holder described in clause (b) and (ii) if
such specified Person is an individual, of such specified Person and (e) each
Person of which such specified Person or an Affiliate (as defined in clauses (a) through
(d)) thereof will, directly or indirectly, beneficially own at least 20% of any
class of Equity Interests at such time.


 


“Associated Bank Agreement” means
the Amended and Restated Reimbursement Agreement dated as of March 21,
2007 between Cellu Tissue-CityForest LLC (formerly known as CityForest
Corporation) and Associated Bank, National Association, as the same may be
amended, supplemented or otherwise modified from time to time


 


“Business Day” means any weekday
other than a weekday on which banks in New York, New York are authorized or
required to be closed.


 


“Buyer Indemnified Person” shall
have the meaning ascribed to such term in the Asset Purchase Agreement.


 


“Contractual Obligation” means,
with respect to any Person, any contract, agreement, deed, mortgage, lease,
license, commitment, promise, undertaking, arrangement or understanding,
whether written or oral and whether express or implied, or other document or
instrument (including any document or instrument evidencing or otherwise
relating to any Indebtedness,) to which or by which such Person is a party or
otherwise subject or bound or to which or by which any property, business,
operation or right of such Person is subject or bound.


 


“Credit Agent” means (i) the “Agent”
(if any) as defined in the Senior Credit Agreement and (ii) in the absence
of any such Agent, a “Lender” or the “Lenders” as defined in the Senior Credit
Agreement.


 


“Credit Agreement(s)” means the Senior Credit
Agreement, the Indenture, Associated Bank Agreement, any notes or other
instruments issued pursuant to any of the foregoing, any agreement providing
for the replacement or refinancing thereof (whether or not with the same


 


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agent or lenders), in each
case as the same may be amended, modified,
extended or renewed, and any document evidending Senior Indebtedness or entered
into or issued in connection with or issued in connection with the issuance of
Senior Indebtedness.


 


“Equity Interests” means (a) any
capital stock, share, partnership or membership interest, unit of participation
or other similar interest (however designated) in any Person and (b) any
option, warrant, purchase right, conversion right, exchange rights or other
Contractual Obligation which would entitle any Person to acquire any such interest
in such Person or otherwise entitle any Person to share in the equity, profit,
earnings, losses or gains of such Person (including stock appreciation, phantom
stock, profit participation or other similar rights).


 


“Excluded Default” means a default
or event of default existing only with respect to Senior Indebtedness that (a) has
an outstanding principal balance of less than $1,000,000 and is not owing under
the Senior Credit Agreement, the Indenture or the Associated Bank Agreement or
any replacement or refinancing of any thereof or (b) is owing to an
Affiliate of the Company.


 


“GAAP” means
generally accepted accounting principles as in effect from time to time in the
United States of America and consistently applied across the periods involved.


 


“Governmental Authority” means any
United States federal, state or local or any foreign government, or political
subdivision thereof, or any multinational organization or authority or any
authority, agency or commission entitled to exercise any administrative, executive,
judicial, legislative, police, regulatory or taxing authority or power, any
court or tribunal (or any department, bureau or division thereof), or any
arbitrator or arbitral body.


 


“Indebtedness” means, with respect to any Person, without
duplication, all obligations (including in respect of principal, accrued
interest, penalties, fees and premiums) of such Person (i) for borrowed
money (including overdraft facilities to the extent drawn on), (ii) evidenced
by notes, bonds, debentures or other similar instruments (other than
performance, surety and appeal bonds arising in the ordinary course of business
in respect of which such Person’s Liability remains contingent), (iii) for
the deferred purchase price of property, goods or services (other than trade
payables or accruals and deferred compensation items incurred in the ordinary
course of business), (iv) under leases that have been, or should have
been, in accordance with GAAP, recorded as capital leases, to the extent
required to be so recorded, (v) in respect of letters of credit and
bankers’ acceptances, (vi) relating to interest rate protection, swap
agreements and collar agreements and (vii) in the nature of guarantees of
the obligations described in clauses (i) through (vi) above of any
other Person.


 


“Indenture” means the Indenture
dated as of March 12, 2004, among Cellu Tissue Holdings, Inc., the
Subsidiary Guarantors party thereto and The Bank of New York, as Trustee, as
the same may be amended, supplemented or otherwise modified from time to time.


 


“Individual Owner” shall have the
meaning ascribed to such term in the Asset Purchase Agreement.


 


“Leases”
mean collectively (i) the lease between Atlantic Paper & Foil,
Corp. of N.Y. and Cellu Tissue – Hauppauge, LLC with respect to the real property
located at 325 Kennedy Drive, Hauppauge, New York 11788, (ii) the lease
between Atlantic Long Island Properties, Inc. and


 


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Cellu Tissue – Hauppauge, LLC with respect to the real
property located at 50 Gilpin Avenue, Hauppauge, New York 11788, and (iii) the
lease between Atlantic Lakeside Properties, LLC and Cellu Tissue – Thomaston,
LLC with respect to the property located at 1201 Barnesville Street, Thomaston,
Georgia 30286.


 


“Lenders” means the Credit Agent
(if applicable) and each lender or noteholder under each Credit Agreement.


 


“Liability” means, with respect to
any Person, any liability or obligation of such Person whether known or
unknown, whether asserted or unasserted, whether determined, determinable or
otherwise, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, whether incurred or consequential, whether
due or to become due and whether or not required under GAAP to be accrued on
the financial statements of such Person.


 


“Members of the Immediate Family”
means, with respect to any individual, (a) such Person’s spouse, (b) each
parent, brother, sister or child of such Person or such Person’s spouse, (c) the
spouse of any Person described in clause (b) above, (d) each child of
any Person described in clauses (a), (b) or (c) above, (e) each
trust created solely for the benefit of one or more of the Persons described in
clauses (a) through (d) above and (f) each custodian or guardian
of any property of one or more of the Persons described in clauses (a) through
(e) above in his capacity as such custodian or guardian.


 


“Non-payment Default” means any
event or condition, other than a Payment Default, that causes, or permits the
holder of any Senior Indebtedness to cause, any Senior Indebtedness to become
due and payable prior to its stated maturity; provided, that “Non-payment
Default” shall not include an Excluded Default.


 


“Payment Default” means any default in the payment
when due (whether at maturity or upon acceleration, mandatory prepayment or
otherwise) of any Senior Indebtedness, including any payment of principal,
interest, premium, letter of credit reimbursement obligations, fees, costs,
expenses or other amounts; provided, that “Payment Default” shall not include
an Excluded Default.


 


“Permitted Junior Securities”
means securities of the Company or any subsidiary or any other Person that are
subordinated in right of payment to all Senior Indebtedness to substantially
the same or greater extent as the Notes are so subordinated as provided in
Schedule B hereto.


 


“Person” means any individual or
corporation, association, partnership, limited liability company, joint
venture, joint stock or other company, business trust, trust, organization,
Governmental Authority or other entity of any kind.


 


“Refinancing Repayment Event”
means any refinancing of the Indebtedness outstanding under the Indenture
which, after giving effect thereto, results in the aggregate principal amount
of Senior Indebtedness outstanding immediately following such refinancing
exceeding $305 million.


 


“Reorganization”
means (i) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding in connection


 


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therewith,
relative to the Company or its assets or (ii) any liquidation, dissolution
or other winding up of the Company, whether voluntary or involuntary and
whether or not involving insolvency or bankruptcy.


 


“Reorganization Securities” means
shares of stock of the Company or any Affiliate, or their successors, as
reorganized, or other securities of the Company or any Affiliate or any other
Person provided for by a plan of reorganization, the payment of which is subordinated
in right of payment to the payment in full of all Senior Indebtedness, where
such plan of reorganization is either authorized by a court decree or order
that states that effect has been given to the subordination of the Notes to the
Senior Indebtedness or approved by holders of Senior Indebtedness as a class.


 


“Sellers’ Representative” shall
mean the person appointed as such under the Asset Purchase Agreement.


 


“Senior Credit Agreement” means
the Credit Agreement, dated as of June 12, 2006, by and among Cellu Paper
Holdings, Inc., Cellu Tissue Holdings, Inc., Interlake Acquisition
Corporation Limited, the Loan Guarantors party thereto, the lenders party
thereto, JPMorgan Chase Bank, N.A., as US Administrative Agent, and JPMorgan
Chase Bank, N.A., Toronto Branch, as Canadian Administrative Agent, as
previously amended and as may be further amended, supplemented or otherwise
modified from time to time.


 


“Senior Indebtedness” means (i) all
Indebtedness under the Senior Credit Agreement, the Indenture, any notes or
other instruments issued pursuant to either of the foregoing, any agreement
providing for the replacement or refinancing thereof (whether or not with the
same agent or lenders), in each case as the same
may be amended, modified, extended or renewed, (ii) all
Indebtedness under or in respect of the Associated Bank Agreement, and (iii) any other Indebtedness that is
permitted to be incurred under the Senior Credit Agreement or the Indenture and
is specifically designated in the instrument evidencing such Indebtedness as “Senior
Indebtedness” for the purpose of this Note.


 


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SCHEDULE B


 


SUBORDINATION PROVISIONS


 


1.1           Notes
Subordinated to Senior Indebtedness.  The
Company covenants and agrees and the Noteholder by his, her or its acceptance
of this Note covenants and agrees for the benefit of the holders of the Senior
Indebtedness that the Notes are subordinated in right of payment as provided in
this Schedule B to the prior payment in full of all Senior Indebtedness.  Until all amounts outstanding under all Credit
Agreements have been paid in full and all obligations thereunder have been
discharged, the Noteholder is not entitled to any payment from the Company on
account of this Note, other than payments of principal and interest pursuant to
Sections 2 and 3.1 of this Note, subject in all cases to the payment blockage
provisions set forth below in this Schedule B.


 


1.2           Payment Over of Proceeds Upon Bankruptcy.


 


(a)           In the
event of (i) any Reorganization or (ii) any general assignment for
the benefit of creditors or any other marshaling of assets or liabilities of
the Company (the events described in the foregoing clauses (i), and (ii) are
referred to collectively as “Proceedings”), then and in any such event the
holders of Senior Indebtedness shall be entitled to receive payment in full of
all Senior Indebtedness, before any Noteholder is entitled to receive any
payment or distribution of any kind or character (excluding Reorganization
Securities and Permitted Junior Securities) on account of the Notes and to that
end the holders of Senior Indebtedness shall be entitled to receive, for
application to the payment of such Senior Indebtedness, any payment or
distribution of assets of the Company of any kind or character (excluding
Reorganization Securities and Permitted Junior Securities) that may be payable
or deliverable in respect of the Notes in connection with any such Proceeding.


 


(b)           If,
notwithstanding Section 1.2(a) of this Schedule B, any Noteholder
shall have received, after the commencement of any Proceeding, any payment or
distribution of assets of the Company of any kind or character in respect of
the Notes before all Senior Indebtedness is paid in full or payment thereof
provided for, then such payment or distribution (excluding Reorganization
Securities and Permitted Junior Securities) shall be paid over or delivered
forthwith upon demand therefor to the holders of Senior Indebtedness for
application to the payment of all Senior Indebtedness remaining unpaid, to the
extent necessary to pay all Senior Indebtedness in full, after giving effect to
any concurrent payment or distribution to or for the holders of Senior
Indebtedness.


 


(c)           Each of the Noteholders
irrevocably authorizes and directs the Lenders and the Credit Agent and its
successors and assigns and any trustee in bankruptcy, receiver or assignee for
the benefit of creditors of the Company, whether in voluntary or involuntary
liquidation, dissolution or reorganization, on its behalf to take such action
as may be necessary or appropriate to effectuate the subordination provisions
and other rights granted to the Credit Agent and the Lenders in Schedule B
(including without limitation to file a proof of claim and to vote upon matters
with respect to which any Noteholder may be able to vote in connection with any
Proceedings relating to the Company) and irrevocably appoints the Lenders and
the Credit Agent and their successors and assigns, acting severally, or any
such trustee, receiver or assignee, each


 


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such Noteholder’s attorney- or attorneys-in-fact for
such purposes with full powers of substitution and resubstitution.


 


1.3           Suspension of Payments When Senior
Indebtedness in Default.


 


(a)           After the
occurrence and during the continuation of any Payment Default, the Company
shall not make any payment or distribute any assets of the Company or its
Subsidiaries of any kind or character (other than (x) Reorganization
Securities, (y) Permitted Junior Securities and (z) payment of
interest by capitalizing it and adding it to the principal amount of the Notes)
on account of the Notes unless and until the earliest to occur of (i) such
Payment Default is cured or waived to the satisfaction of the holders of the
Senior Indebtedness as required under the terms of the Senior Indebtedness
under which such Payment Default occurred, (ii) all Senior Indebtedness
with respect to which such Payment Default occurred is discharged in full or (iii) the
benefit of this provision has been waived by the holders of the Senior
Indebtedness as required under the terms of the Senior Indebtedness under which
such Payment Default occurred, after which event under clause (i), (ii) or
(iii) the Company shall resume making any and all required payments in
respect of the Notes, including any payment in arrears at the Default Rate
(provided that, for the avoidance of doubt, the Default Rate shall not apply
during any period when there is no continuing Event of Default).


 


(b)           After the
occurrence and during the continuation of any Non-payment Default and the
receipt by the Company and the Noteholders of a written notice from the holders
of Senior Indebtedness which notice makes reference to the Notes, the
subordination provisions of this Schedule B and states that a Non-payment
Default has occurred, the Company shall not make any payment or distribute any
assets of the Company or its Subsidiaries of any kind or character (other than (x) Reorganization
Securities, (y) Permitted Junior Securities and (z) payment of
interest by capitalizing it and adding it to the principal amount of the Notes)
on account of the Notes unless and until the earliest to occur of (i) such
Non-payment Default is cured or waived to the satisfaction of the required
holders of the Senior Indebtedness under which such Non-payment Default
occurred, (ii) all Senior Indebtedness is discharged in full, (iii) the
required holders of Senior Indebtedness under which such Non-payment Default
occurred waive the benefit of this provision, after which event under clause
(i), (ii) or (iii) the Company shall resume making any and all
required payments in respect of the Notes, including any payments in arrears at
the Default Rate (provided that, for the avoidance of doubt, the Default Rate
shall not apply during any period when there is no continuing Event of
Default), or (iv) 180 days from the date of receipt by the Noteholders of
such notice of the occurrence of a Non-payment Default.


 


(c)           If,
notwithstanding the foregoing, the Company makes any payment to any holder of a
Note prohibited by the foregoing provisions of this Section 1.3 of this
Schedule B, then such payment shall be paid over and delivered forthwith by
such holder to the holders of Senior Indebtedness entitled thereto.


 


(d)           Notwithstanding
any provision of this Section 1.3 to the contrary, the holders of Senior
Indebtedness shall not be permitted to declare a payment blockage with respect
to a Non-payment Default under Section 1.3(b) more than one time in
any 360 day period.


 


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1.4           Standstill.  If
any Event of Default occurs and continues, the Noteholders shall not, without
the prior written consent of the holders of all Senior Indebtedness, accelerate
the maturity of, or institute proceedings to enforce or collect, any Note or
commence or join with any other creditor of the Company in commencing any
Proceeding against the Company until the Senior Indebtedness has been
discharged in full or 180 days from the date of receipt by the holders of
Senior Indebtedness of written notice by the Noteholders that an Event of
Default has occurred, whichever first occurs. 
If any Noteholder,
contrary to this Schedule B, commences or participates in any action or
Proceeding against the Company, the holders of the Senior Indebtedness may
intervene and interpose as a defense or dilatory plea the making of this
Note.  Should the Noteholders, contrary
to this Schedule B, in any way attempt to enforce the payment of this Note or
any part thereof, the holders of the Senior Indebtedness may restrain the
Noteholder from so doing, it being understood and agreed that (i) the
damages suffered by the holders of the Senior Indebtedness from the Noteholder’s
actions may at that time be difficult to ascertain and may be irreparable, and (ii) the
Noteholder waives any defense that the holders of the Senior Indebtedness
cannot demonstrate damage and/or can be made whole by the awarding of damages.


 


1.5           Provisions
Solely to Define Relative Rights.  The
provisions of this Schedule B are and are intended solely for the purpose of
defining the relative rights of the Noteholders, on the one hand, and the
holders of Senior Indebtedness, on the other hand.  Nothing contained in this Schedule B or in
the Notes is intended to or shall: (a) impair, as among the Company and
the Noteholders, the obligation of the Company to pay to the Noteholders all
amounts payable under the Notes as and when the same shall become due and
payable, all in accordance with the terms hereof and of the Notes and subject
to the terms and conditions of this Schedule B; (b) prevent the
Noteholders from exercising all remedies otherwise permitted by applicable law
upon default under this Note, subject to the terms and conditions of this
Schedule B; or (c) limit the rights of Noteholders to pursue any rights or
remedies hereunder or under applicable law, subject to the terms and conditions
of this Schedule B.


 


1.6           Payments
Held in Trust.  Should any distribution
or the proceeds thereof, in respect of the Notes, be collected or received by
the Noteholders at a time when the Noteholders are not permitted to receive any
such distribution or proceeds thereof, including, if the same is collected or
received when there is or would be after giving effect to such payment, a
Payment Default or Non-payment Default, then the Noteholders shall forthwith
deliver, or cause to be delivered, the same to the holders of Senior
Indebtedness in precisely the form received by the Noteholders (except for any
necessary endorsement) and until so delivered the same shall be held in trust
by the Noteholders for the benefit of the Lenders and the Credit Agent and
shall not be commingled with other property of the Noteholders.


 


1.7           No Waiver
of Subordination Provisions; Indemnification by Noteholders. No right of any
present or future holder of any Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company, or by any act or failure to
act by any such holder, or by any noncompliance by the Company with the terms,
provisions and covenants of this Note, regardless of any knowledge thereof that
any such holder may have or be otherwise charged with.  The Noteholder agrees to indemnify the
holders of the Senior Indebtedness and to hold the holders of the Senior
Indebtedness harmless from and against any and all costs and expenses


 


B-3

















 


(including, without limitation, reasonable attorney’s fees and expenses) as
they arise, relating to (i) any actions of the Noteholder taken contrary
to this Schedule B and (ii) the enforcement of this Schedule B by the
holders of the Senior Indebtedness against the Noteholder.


 


1.8           Notices.  The Noteholders hereby agree, and by
accepting delivery of any Note their assigns hereby agree, to provide to the
Company notice in accordance with Section 9.1 of the Note of any change of
address of such holder and the address of any assignee of any Note and the
Company agrees to update the Noteholder Register promptly upon receipt of such
Notice.  In so relying on the Noteholder
Register, and otherwise delivering notice to the Noteholders as required by any
section of this Schedule B, any holder of Senior Indebtedness shall not be
prejudiced and no holder of a Note shall benefit as the result of a failure of
any Noteholder to receive the notice so given due to the holder of Senior
Indebtedness having relied upon any incorrect notice information provided to
such holder by the Company or any failure by the Company to maintain an
accurate Noteholder Register and provide it to any holder of Senior
Indebtedness.


 


1.9           Benefits
of Subordination.  Each holder of Senior
Indebtedness is entitled to rely on this Schedule B and is a beneficiary
hereof, and the holders of Senior Indebtedness are entitled to directly enforce
the provisions of this Schedule B against the Noteholders and the Company
(including having the right to bring an action for specific performance or
other equitable relief, and without requiring that all holders of Senior
Indebtedness or the Notes be named as parties in such action).


 


B-4

















 


SCHEDULE C


 


NOTICE ADDRESSES FOR HOLDINGS OF SENIOR INDEBTEDNESS


 


(as of July 2, 2008)


 


JP
Morgan Chase Bank, N.A.


120 S.
LaSalle St., 8th Floor


Chicago,
Illinois 60603


Attention:  Michael Culbertson


Telecopy:  (312) 
661-9604


 


with a
copy to:


 


JP
Morgan Chase Bank, N.A.


One
Chase Square, Tower 25


Rochester,
New York 14643


Attention:  John Hariaczyi


Telecopy:  (585) 258-7440


 


JP
Morgan Chase Bank, N.A.,


  Toronto Branch


200 Bay
Street, Suite 1800


Toronto,
Ontario M5J 2J2


Attention:  Funding Office


Telecopy:  (416) 981-9174


 


The
Bank of New York


101
Barclay Street, Floor 8W


New
York, New York 10286


Attention:  Corporate Trust Administration


Telecopy:  (212) 815-5707


 


Associated
Bank, National Association


200
North Adams Street


Green
Bay, Wisconsin 54301


Attention:  Mr. Stephen E. Pasowicz


Telecopy:  (920) 433-3290


 


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